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I have seen a report, where the appraiser presented the analysis of the subject’s financial statements and trends, then stated that because the subject business reported a profit, it was a stronger performing business and used that statement to justify selecting higher market multiples and lower capitalization rates. Just for fun, I pulled a Bizminer report for businesses in that industry and size category, and when I looked at those ratios, I saw that the subject business’ reported profits were much lower than that of the industry average. I am pretty sure that if the appraiser had taken the time to perform a basic comparative analysis, that the value conclusion reached would have been materially different.
Once we have pulled this benchmarking industry data, it is important to compare the subject business to it, so we can see what benchmarks the subject falls short on or is surpassing. I have found that very few businesses that I have been asked to appraise, are either an average or a median business. Which leads me to the conclusion that using an average or a median market multiple may often be the wrong choice for an appraiser.
The rates and multiples we business appraisers use, are dependent on the data we analyze, our analysis of that data, and then our interpretation of what the analysis indicates for the subject. When we provide our opinion of value to the client, it really needs to be our opinion described in that report, and not just what the math said. Remember, business appraisal is both an art as well as a science. Don’t overemphasize one at the expense of the other.
I’m happy to chat about financial ratios, or other valuation topics! If you have any questions, you can reach out. CanyonValuations@gmail.com
Have a happy and successful new year!
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